---

SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-QSB

[X] Quarterly Report Under Section 13 or
15(d) of the Securities Exchange Act of 1934. For the quarterly period ended: June 30, 2006

OR

[_] Transition Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934. 
For the transition period from: ________  to _________

Commission File Number: 000-030813

AlphaRx, Inc.(Name of Small Business Issuer in its Charter)

|Delaware                        | 98-0177440                              
|------------------------------- | ----------------------------------------
|(State or other jurisdiction of | (I.R.S.
    Employer Identification No.)
|incorporation or organization)  |                                         
|                                |                                         

168 Konrad Crescent, Suite 200 
Markham, Ontario, Canada L3R 9T9
(Address of principal executive offices)

Registrant's telephone number, including area
code: (905) 479-3245

Securities registered pursuant to Section 12(b)
of the Act: None

Securities registered pursuant to Section 12(g)
of the Act: Common Stock, $.0001 par value(Title of Class)

Check whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.     Yes [X]        
No [ ]

The number of outstanding shares of registrant's
Common Stock on August 11, 2006 was 57,508,112.

Transitional Small Business Disclosure Format.    
Yes [ ]         No [X]

---

ALPHARX, INC.FORM 10-QSB
JUNE 30, 2006
TABLE OF CONTENTS

|                                                                                                                           |   
|-------------------------------------------------------------------------------------------------------------------------- | --
|Unaudited Interim
    Consolidated Balance Sheets as of June 30 2006 and September 30, 2005                                | 3 
|                                                                                                                           |   
|Unaudited Interim
    Consolidated Statements of Operations for the nine months ended June 30,
    2006 and June 30, 2005  | 4 
|                                                                                                                           |   
|Unaudited
    Interim Consolidated Statements of Operations for the three months ended
    June 30, 2006 and June 30, 2005 | 5 
|                                                                                                                           |   
|Unaudited
    Interim Consolidated Statements of Changes in Shareholders Equity (Deficit)                                 | 6 
|                                                                                                                           |   
|Unaudited
    Interim Consolidated Statements of Cash Flow for the nine months ended June
    30, 2006 and June 30, 2005   | 7 
|                                                                                                                           |   
|Condensed Notes to Unaudited Interim Consolidated Financial Statements                                                     | 8 
|                                                                                                                           |   
|Managements Discussion and Analysis of Financial Condition and Plan of
    Operation                                      | 14
|                                                                                                                           |   
|Other Information                                                                                                          | 20

2

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ALPHARx, INC. INTERIM CONSOLIDATED BALANCE
SHEETS
AS AT JUNE 30, 2006 AND SEPTEMBER 30,2005 
(UNAUDITED)

|                                                                                                           |   | June 30,     | September 30,
|---------------------------------------------------------------------------------------------------------- | - | ------------ | -------------
|                                                                                                           |   | 2006         |              
|CURRENT ASSETS                                                                                             |   |              |              
|                                                                                                           |   |              |              
|Cash and Cash Equivalents                                                                                  | $ | 1,272,756    | $            
|Accounts Receivable, net                                                                                   |   | 52,810       |              
|Prepaid Expenses                                                                                           |   | 13,989       |              
|Inventory                                                                                                  |   | -            |              
|                                                                                                           |   |              |              
|TOTAL CURRENT ASSETS                                                                                       |   | 1,339,555    |              
|                                                                                                           |   |              |              
|                                                                                                           |   |              |              
|PROPERTY, PLANT & EQUIPMENT, net                                                                           |   | 303,155      |              
|OTHER ASSETS                                                                                               |   |              |              
|Licensing Right (Note 3)                                                                                   |   | 1            |              
|                                                                                                           |   |              |              
|TOTAL ASSETS                                                                                               |   | 1,642,711    |              
|                                                                                                           |   |              |              
|CURRENT LIABILITIES                                                                                        |   |              |              
|Accounts Payable and Accrued
    Liabilities                                                               |   | 597,955      |              
|Notes Payable, net of discount
    (Note 4)                                                                |   | 437,462      |              
|Litigation Liabilities (Note 5)                                                                            |   | -            |              
|                                                                                                           |   |              |              
|TOTAL CURRENT LIABILITIES                                                                                  |   | 1,035,417    |              
|                                                                                                           |   |              |              
|Minority Interest (Note 6)                                                                                 |   | 165,515      |              
|                                                                                                           |   |              |              
|SHAREHOLDERS EQUITY (DEFICIENCY)                                                                          |   |              |              
|                                                                                                           |   |              |              
|Common Stock: $ 0.0001 par value,                                                                          |   |              |              
|Authorized 250,000,000 shares;
    issued and outstanding June 30, 2006 and September 30, 2005: 57,508,112 |   | 5,752        |              
|Additional paid-in capital                                                                                 |   | 14,395,007   |              
|Deficit                                                                                                    |   | (13,958,980) |              
|                                                                                                           |   |              |              
|TOTAL SHAREHOLDERS EQUITY                                                                                 |   | 441,779      |              
|                                                                                                           |   |              |              
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                 | $ | 1,642,711    | $            

See condensed notes to consolidated financial statements

3

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|ALPHARx, INC.                                                
|-------------------------------------------------------------
|INTERIM CONSOLIDATED
    STATEMENTS OF OPERATIONS            
|FOR THE NINE
    MONTHS ENDED JUNE 30, 2006 AND 2005         
|(UNAUDITED)                                                  
|                                                             
|                                                             
|Nine months ended June 30,                                   
|                                                             
|SALES                                                        
|LICENSE FEES AND ROYALTIES (Note 7)                          
|                                                             
|TOTAL REVENUES                                               
|                                                             
|COST OF SALES                                                
|                                                             
|GROSS MARGIN                                                 
|                                                             
|                                                             
|GENERAL AND ADMINISTRATIVE EXPENSES                          
|STOCK BASED COMPENSATION EXPENSE AND WARRANT
    AMORTIZATION
|RESEARCH AND DEVELOPMENT EXPENSES                            
|SALES AND MARKETING EXPENSES                                 
|DEPRECIATION                                                 
|LOSS FROM OPERATIONS                                         
|                                                             
|OTHER INCOME AND EXPENSES                                    
|                                                             
|Interest (Income)/Expense, net                               
|                                                             
|LOSS BEFORE INCOME TAXES                                     
|                                                             
|INCOME TAX                                                   
|                                                             
|MINORITY INTEREST                                            
|                                                             
|NET LOSS                                                     
|                                                             
|NET LOSS PER COMMON SHARE, BASIC AND DILUTED                 
|                                                             
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES
    OUTSTANDING     
|                                                             
|See condensed notes to consolidated financial
    statements 

4

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|ALPHARx, INC.INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
    FOR THE THREE MONTHS ENDED JUNE 30, 2006 AND 2005
    (UNAUDITED)
|--------------------------------------------------------------------------------------------------------------------------------

|                                                              |   |            |  |   |           
|------------------------------------------------------------- | - | ---------- |  | - | ----------
|Three months ended
    June 30,                               |   | 2006       |  |   | 2005      
|                                                              |   |            |  |   |           
|SALES                                                         | $ | 5,138      |  | $ | 18,137    
|LICENSE FEES AND
    ROYALTIES (Note 7)                       |   | 909,201    |  |   | -         
|                                                              |   |            |  |   |           
|TOTAL REVENUES                                                |   | 914,339    |  |   | 18,137    
|                                                              |   |            |  |   |           
|COST OF SALES                                                 |   | 401        |  |   | 8,100     
|                                                              |   |            |  |   |           
|GROSS MARGIN                                                  |   | 913,938    |  |   | 10,037    
|                                                              |   |            |  |   |           
|                                                              |   |            |  |   |           
|GENERAL AND
    ADMINISTRATIVE EXPENSES                       |   | 407,728    |  |   | 254,049   
|STOCK BASED
    COMPENSATION EXPENSE AND WARRANT AMORTIZATION |   | 178,025    |  |   | 1,389,124 
|RESEARCH AND
    DEVELOPMENT EXPENSES                         |   | 452,051    |  |   | 472,133   
|SALES AND MARKETING
    EXPENSES                              |   | 53,719     |  |   | 151,710   
|DEPRECIATION                                                  |   | 20,961     |  |   | 16,074    
|LOSS FROM OPERATIONS                                          |   | 198,546    |  |   | 2,273,053 
|                                                              |   |            |  |   |           
|OTHER INCOME AND
    EXPENSES                                 |   |            |  |   |           
|                                                              |   |            |  |   |           
|Interest (Income)/Expense, net                                |   | 36,547     |  |   | (3,705)   
|                                                              |   |            |  |   |           
|LOSS BEFORE INCOME TAXES                                      |   | 235,093    |  |   | 2,269,348 
|                                                              |   |            |  |   |           
|INCOME TAX                                                    |   | -          |  |   | -         
|                                                              |   |            |  |   |           
|MINORITY INTEREST                                             |   | (29,084)   |  |   | -         
|                                                              |   |            |  |   |           
|NET LOSS                                                      | $ | 206,009    |  | $ | 2,269,348 
|                                                              |   |            |  |   |           
|NET LOSS PER COMMON
    SHARE, BASIC AND DILUTED              |   | (0.01)     |  |   | (0.04)    
|                                                              |   |            |  |   |           
|WEIGHTED AVERAGE
    NUMBER OF COMMON SHARES OUTSTANDING      |   | 57,508,112 |  |   | 57,508,112

See condensed notes to consolidated financial statements

5

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|ALPHARx, INC.INTERIM CONSOLIDATED STATEMENTS OF CHANGES
    IN SHAREHOLDERS EQUITY (DEFICIT)
    (UNAUDITED)
|-------------------------------------------------------------------------------------------------------------
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Balance as of September 30, 2004                                                                             
|                                                                                                             
|Conversion of Promissory Notes                                                                               
|                                                                                                             
|Issuance of Stock
    Options for consulting services                                                        
|                                                                                                             
|Stock Based
    compensation expense                                                                         
|                                                                                                             
|Net Loss for the year                                                                                        
|                                                                                                             
|Balance as of September 30, 2005                                                                             
|                                                                                                             
|Issuance of Stock Options for
    consulting services                                                        
|                                                                                                             
|Stock Based
    compensation expense                                                                         
|                                                                                                             
|Unamortized discount related to
    issuance of warrants                                                     
|                                                                                                             
|Net Loss for the period                                                                                      
|                                                                                                             
|Issuance
    of subsidiarys common stock                                                                    
|                                                                                                             
|Balance as of June 30, 2006                                                                                  

See condensed notes to consolidated financial statements

6

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|ALPHARx, INC.INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
    FOR THE NINE MONTHS ENDED JUNE 30, 2006 AND 2005
    (UNAUDITED)
|-------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                               
|Nine
    months ended June 30,                                                                                                 
|                                                                                                                               
|CASH FLOWS
    FROM OPERATING ACTIVITIES                                                                                       
|Net Loss                                                                                                                       
|Adjustments to reconcile net loss to net cash
    used in operating
    activities:                                            
|Depreciation and amortization                                                                                                  
|Warrant amortization                                                                                                           
|Stock based compensation expense                                                                                               
|Options issued for services rendered                                                                                           
|Changes in assets and liabilities:                                                                                             
|Decrease in Inventory                                                                                                          
|Increase in Accounts Receivable                                                                                                
|Decrease in Prepaid Expenses                                                                                                   
|Increase/(decrease) in Accounts Payable and
    Accrued Liabilities                                                            
|                                                                                                                               
|NET CASH
    USED IN OPERATING ACTIVITIES                                                                                      
|                                                                                                                               
|CASH FLOWS
    FROM INVESTING ACTIVITIES                                                                                       
|                                                                                                                               
|Purchase
    of Machinery & Equipment, net of disposals                                                                        
|                                                                                                                               
|NET CASH
    PROVIDED BY (USED IN) INVESTING ACTIVITIES                                                                        
|                                                                                                                               
|CASH FLOWS
    FROM FINANCING ACTIVITIES                                                                                       
|Issuance of 15% equity in subsidiary common stock                                                                              
|Minority interest                                                                                                              
|Discount on issuance of Notes Payable                                                                                          
|Issuance (repayment) of Notes Payable                                                                                          
|                                                                                                                               
|NET CASH
    PROVIDED BY (USED IN) FINANCING ACTIVITIES                                                                        
|                                                                                                                               
|NET
    INCREASE (DECREASE) IN CASH                                                                                            
|                                                                                                                               
|CASH, and
    cash equivalents, beginning of period                                                                            
|                                                                                                                               
|CASH, and
    cash equivalents, end of period                                                                                  
|                                                                                                                               
|Income Tax
    Paid                                                                                                            
|Interest
    Paid                                                                                                              

See condensed notes to consolidated financial statements

7

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ALPHARX INC. CONDENSED
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 
(UNAUDITED)

NOTE 1. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements
have been prepared in accordance with the instructions to Form 10-QSB and do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of all recurring accruals) considered
necessary for fair presentation have been included. Operating results for the
interim periods are not necessarily indicative of the results that may be
expected for the year ended September 30, 2006. Interim financial statements
should be read in conjunction with the Companys annual audited financial
statements.

NOTE 2. NATURE OF BUSINESS AND GOING CONCERN

ALPHARX, INC. (the Company) was incorporated under the laws
of the State of Delaware on August 7, 1997. The company is an emerging
pharmaceutical company specializing in the formulation of therapeutic products
using proprietary drug delivery technologies. The company was formally known as
LOGIC TECH INTERNATIONAL, INC., and had its corporate name changed during the
fiscal year of 2000.

Effective April 22, 2005 AlphaRx International Holdings
Limited (a British Virgin Island company and a wholly-owned subsidiary of the
Company at that time.) entered into a Joint Venture agreement with Basin
Industrial Limited (a British Virgin Islands Company and a wholly-owned
subsidiary of Advance Pharmaceutical Co. Ltd.). The Joint Venture, AlphaAP Inc.,
is involved in manufacturing and marketing of certain of the Companys existing
products.

Effective June 22, 2006, New Super Limited subscribed for
1,500 shares of common stock of AlphaRx International Holdings Ltd.("AIH"),
previously a wholly-owned subsidiary of the Company. The Company now owns 85% of
AIH.

Effective June 30, 2006, AIH acquired 100% of Alpha Life
Sciences Ltd. ("ALS") for a nominal amount and the assumption of approximately
$64,660 of third party liabilities. ALS is involved in obtaining necessary
regulatory approvals for the manufacture and distribution of the Companys
products in the Asian market.

The consolidated financial statements reflect the activities
of the Company, 100% of AlphaRx Canada Limited and 85% of AlphaRx International
Holdings Limited and ALS (AIHs wholly owned subsidiary). All material
inter-company accounts and transactions have been eliminated.

The Company holds an indirect 42.5% interest in AlphaAP
Inc.("AAP"), a joint venture established between the Company (via its AIH
subsidiary) and Basin Industrial Limited (an independent third party). As the
Company contributes no funds, and does not provide management or direction to
the joint venture, the Companys interest in the joint venture is not
consolidated into the financial statements. AIH will receive a 5% royalty on all
revenues generated by AAP. Although activity in AAP has commenced, the Company
will not recognize royalty revenue until payment is received and a payment
history is established.

The accompanying consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business.
Accordingly, they do not include any adjustments relating to the realization of
the carrying value of assets or the amounts and classification of liabilities
that might be necessary should the company be unable to continue as a going
concern. Continuance of the company as a going concern is dependent on its
future profitability and on the on-going support of its shareholders, affiliates
and creditors.

8

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NOTE 3. LICENSING RIGHTS

The Company acquired world-wide exclusive commercialization
rights for VT-1 from Select Therapeutics Inc. in January 2003 with the intention
of commercializing this drug. Having unsuccessfully attempted to resell these
commercialization rights, they have been written down to a nominal value due
primarily to prohibitive development costs, and the fact that there is no market
for these rights.

NOTE 4. NOTES PAYABLE

The Company issued $702,210 in promissory notes during the
nine months ended June 30, 2006. These notes bear interest at 12% per annum and
are repayable on the first anniversary date of issuance. Prepayment of these
notes prior to the first anniversary date is permitted.

In conjunction with these promissory notes, the Company
issued warrants (See also Note 9  Warrants). This in turn required a discount
to be established capped at the principal amount of the promissory notes.

The Company also assumed $62,986 in Promissory Notes in
conjunction with the acquisition of Alpha Life Sciences Ltd. by its subsidiary
AlphaRx International Holdings Ltd., effective June 30, 2006.

|Promissory Notes
    Issued:      | $702,210 
|--------------------------------- | ---------
|Discount on
    Promissory Notes: | (482,062)
|Interest Accrued                  | 24,114   
|Discount
    Amortized:           | 130,214  
|Promissory Notes
    Assumed      | 62,986   
|                                  |          
|Promissory Notes
    Payable      |          
|June 30, 2006:                    | $437,462 

There remains $351,848 in discount to be amortized over the
life of the promissory notes. See also Note 11  subsequent events for
additional new promissory notes issued subsequent to June 30, 2006.

During the nine months ended June 30, 2005, the Company
converted $520,347 in convertible promissory notes into 5,203,470 shares of
common stock plus warrants to purchase 10,406,940 shares of common stock at an
exercise price of $0.30 per share. These warrants expire during September and
October, 2007.

NOTE 5. LITIGATION LIABILITIES

The Company received court documentation that the lawsuit
filed against it in 2002 was dismissed as of May, 2006. Accordingly the
remaining litigation liability has been reversed as the Company is no longer
liable for any damages or legal fees related to this action.

NOTE 6. MINORITY INTEREST

Effective June 22, 2006, AlphaRx International Holdings Ltd.
("AIH") issued 1,500 shares of its common stock to New Super Limited ("NSL") at
a price of approximately $HK 6,667 per share or $HK 10 million in cash. (USD
$1,288,826). There are now 10,000 common shares outstanding of which 8,500 or
85% belong to the Company. Prior to the transaction the Company owned 100% of
AIH. With the consolidation of only 85% of AIH, a minority interest was
established, representing net amounts owing to the minority shareholder. The
capital infusion into AIH is accounted for as additional paid in capital on the
consolidated financial statements of the Company.

In accordance with the agreement between the Company and NSL,
there will be an additional issuance of AIH stock from treasury on or before
September 15, 2006 for total consideration of $HK 10 million, in exchange for an
additional 15% of common stock . Resultingly NSL will own 30% of AIH.

9

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NOTE 7. LICENSE FEES

License fee revenues are recognized under the following
circumstances: Persuasive evidence of an agreement exists, the Company has
delivered all the elements under the agreement, and collection of amounts under
the agreement are probable.

NOTE 8. COMMON STOCK

The Company is authorized to issue 250,000,000 shares of
common stock. As of June 30, 2006, there remains issued and outstanding
57,508,112 shares of such common stock which has a stated par value of $0.0001
per share.

There were no shares issued during the nine months ended June
30, 2006. During the nine months ended June 30, 2005, $520,347 of convertible
promissory notes were converted into 5,203,470 shares of common stock at $0.10
per share and 10,406,940 warrants to purchase shares of common stock at an
exercise price of $0.30 per share.

NOTE 9. STOCK OPTION PLANS

The Company has a Stock Option Plan (the "Plan") under which
officers, key employees, certain independent contractors, and non-employee
directors may be granted options to purchase shares of the Companys authorized
but unissued common stock. This Plan was terminated during fiscal 2001. Under
this Plan, the option exercise price is $0.10. Outstanding stock options granted
under the Plan will remain in effect until the expiration date specified in
those options. Options currently expire no later than 10 years from the grant
date and generally vest within five years. Proceeds received by the Company from
exercises of stock options are credited to common stock and additional paid-in
capital. Additional information with respect to the Plans stock option activity
is as follows:

|                                                         | Number of | Weighted
|-------------------------------------------------------- | --------- | --------
|                                                         | Shares    | Average 
|                                                         |           | Exercise
|                                                         |           | Price   
|Options outstanding and exercisable at June
    30, 2006 | 1,150,000 | $0.10   

The Company adopted a new option plan on February 10, 2003
under which options to purchase 1,500,000 common shares will be granted to
certain key employees, consultants and directors. Under the Plan, the option
exercise price and its fair market value are determined to be $0.50 -$0.69. All
options will expire on February 10, 2008 and will vest, and become exercisable
in three instalments. Proceeds received by the Company from exercises of stock
options are credited to common stock and additional paid-in capital. Additional
information with respect to the Plans stock option activity is as follows:

|                                                         | Number of | Weighted
|-------------------------------------------------------- | --------- | --------
|                                                         | Shares    | Average 
|                                                         |           | Exercise
|                                                         |           | Price   
|Outstanding at February 10, 2003 (plan
    adoption)     | 0         |         
|Granted during fiscal 2003                               | 645,000   | $0.63   
|Exercised                                                | 0         | $0.00   
|Cancelled                                                | 75,000    | $0.63   
|Options outstanding and exercisable at June
    30, 2006 | 570,000   | $0.63   

10

---

The Company granted 645,000 stock options to consultants
during fiscal 2003. We recognized $280,594 in administrative expenses related to
the granting of these options during fiscal 2003. The fair value of each option
granted during 2003 was determined using the Black-Scholes Option Pricing
Method.
The Company did not grant any stock options during fiscal
2004. The Company, via written consent from a majority of the holders of common
stock, approved the adoption of a new option plan during July, 2004. Under this
plan the Company can issue up to 24,000,000 options to purchase common stock.
Under this plan the Company granted the following options to employees and
consultants during fiscal 2005 and during the first quarter of fiscal 2006
ending December 31st, 2005:

|                                             | Number of  | Weighted
|-------------------------------------------- | ---------- | --------
|                                             | Shares     | Average 
|                                             |            | Exercise
|                                             |            | Price   
|Outstanding at July 24, 2004 (plan adoption) | 0          |         
|Granted during fiscal 2004                   | 0          |         
|Granted during fiscal 2005                   | 20,710,000 | $0.16   
|Granted during Q1, fiscal 2006               | 3,290,000  | $0.075  
|Exercised/Cancelled                          | 0          |         
|Options outstanding at June 30, 2006         | 24,000,000 | $0.15   
|Options exercisable at June 30, 2006         | 20,710,000 | $0.16   

Additional information with respect to the Plans stock option activity is as
follows:

|Grant Date | Quantity   | Option | Expiry  | Fair Value | Risk   | Expected | Expected   | Expected
|---------- | ---------- | ------ | ------- | ---------- | ------ | -------- | ---------- | --------
|           | Granted    | Price  |         |            | Free   | Life     | Volatility | Dividend
|           |            |        |         |            | Rate   |          |            |         
|Nov 15,    | 13,220,000 | $0.15  | Nov 15, | $1,448,922 | 2.32%  | 10       | 185%       | NIL     
|2004       |            | to     | 2014    |            |        | years    |            |         
|           |            | $0.50  |         |            |        |          |            |         
|Jan 10,    | 7,000,000  | $0.15  | Feb 8,  | $1,045,056 | 2.02%  | 10       | 177%       | NIL     
|2005       |            |        | 2015    |            |        | years    |            |         
|Feb 8,     | 390,000    | $0.15  | Feb 8,  | $53,894    | 1.93%  | 10       | 156%       | NIL     
|2005       |            |        | 2015    |            |        | years    |            |         
|May 25,    | 100,000    | $0.13  | May 25, | $7,627     | 2.00%  | 10       | 70%        | NIL     
|2005       |            |        | 2015    |            |        | years    |            |         
|Oct 17,    | 3,290,000  | $0.075 | Oct 17, | $244,559   | 4.50 % | 10       | 75%        | NIL     
|2005       |            |        | 2015    |            |        | years    |            |         
|           | 24,000,000 |        |         | $2,800,058 |        |          |            |         

Of these options, 600,000 which were granted to consultants
vested immediately, and the remaining 23,400,000 have vested or will vest on the
first anniversary of the grant date.

A majority of shareholders approved the 2006 Option Plan at
the Annual General Meeting held March 29, 2006. Under this Plan up to 5,000,000
options may be granted. As of June 30, 2006 no options have been granted under
the 2006 Option Plan.

The Company has adopted the fair value accounting for
employee stock options as per SFAS 123(R) using the modified retrospective
application method, effective April 1, 2005. The Company recorded $655,475 in
stock based compensation expense during the nine months ended June 30, 2006
($1,443,797 for the nine months ended June 30, 2005). The Black-Scholes option
pricing model was used to calculate this expense. There remains $72,362 in stock
compensation to be expensed over the vesting period of these options.

11

---



Had the Company continued to use APB 25, and not reflected employee stock
based compensation expense, net loss and net loss per share both pre-tax and
after tax basis would have been as follows:

|                                 | As reported using | Pro Forma per
|-------------------------------- | ----------------- | -------------
|                                 | SFAS 123(R)       | APB 25       
|                                 |                   |              
|Stock Based compensation         | $ 655,475         | $ 172,196    
|                                 |                   |              
|Net Loss (pre-tax/after tax)     | $(1,947,036)      | $(1,463,757) 
|                                 |                   |              
|Basic and Diluted Loss per share | $(0.03)           | $(0.03)      

NOTE 10. WARRANTS

The Company has the following warrants outstanding to purchase common stock
at June 30, 2006:





12

---





|Warrants issued in conjunction with financing
    costs whereby one   |           
|--------------------------------------------------------------------- | ----------
|warrant entitles the holder to purchase one
    share of common stock |           
|at an exercise price of $1.10, expiring
    December 19, 2007.        | 670,275   
|                                                                      |           
|Warrants issued in conjunction with financing
    costs whereby one   |           
|warrant entitles the holder to purchase one
    share of common stock |           
|at an exercise price of $0.65 expiring June
    17, 2006.             | 75,524    
|                                                                      |           
|Warrants issued in return for financial
    advisory services whereby |           
|one warrant entitles the holder to purchase
    one share of common   |           
|stock at an exercise price of $0.05, expiring
    September 1, 2007.  |           
|This warrant can only be exercised after
    January 29, 2005.        | 3,000,000 
|                                                                      |           
|Warrants issued in conjunction with financing
    costs whereby one   |           
|warrant entitles the holder to purchase one
    share of common stock |           
|at an exercise price of $0.15, expiring
    September 1, 2007.        | 2,994,642 
|                                                                      |           
|Warrants issued in conjunction with financing
    costs whereby one   |           
|warrant entitles the holder to purchase one
    share of common stock |           
|at an exercise price of $0.30, expiring
    September 1, 2007.        | 2,287,669 
|                                                                      |           
|Warrants issued in conjunction with
    conversion of promissory      |           
|notes and in conjunction with the private
    placement completed     |           
|during July and September, 2004. One warrant
    entitles the holder  |           
|to purchase one share of common stock at an
    exercise price of     |           
|$0.30. Expiry dates: July 21, 2007 
    27,505,378; September 1,     |           
|2007  12,426,114; October 13, 2007 
    5,204,160.                  | 45,135,652
|                                                                      |           
|Warrants issued in conjunction with the
    issuance of Promissory    |           
|Notes during February, 2006. One warrant
    entitles the holder to   |           
|purchase one share of common stock at an
    exercise price of $0.10, |           
|expiring February 13, 2008.                                           | 1,577,453 
|                                                                      |           
|Warrants issued in conjunction with the
    issuance of Promissory    |           
|Notes during March, 2006. One warrant
    entitles the holder to      |           
|purchase one share of common stock at an
    exercise price of $0.10, |           
|expiring March 31, 2008                                               | 3,182,000 
|                                                                      |           
|Warrants issued in conjunction with the
    issuance of Promissory    |           
|Notes during June, 2006. One warrant entitles
    the holder to       |           
|purchase one share of common stock at an
    exercise price of $0.10, |           
|expiring June 30, 2008                                                | 300,000   
|                                                                      |           
|Total Warrants Outstanding                                            | 59,223,215

NOTE 11: SUBSEQUENT EVENTS

The Company has issued an additional CAD $100,000 (USD $89,590) in promissory
notes subsequent to June 30, 2006 for working capital purposes. These promissory
notes bear interest at the rate of 12% per annum and are due on the first
anniversary date of issuance. Prepayment of these notes prior to the first
anniversary date is permitted.

NOTE 12: RECLASSIFICATIONS

Certain amounts in prior year's financial statements have been restated to
conform to current year presentation.

13

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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN
OF OPERATION

The following discussion and analysis should be read in conjunction with the
Financial Statements, including the Notes thereto, appearing in this Form
10-QSB. Except for the historical information contained herein the foregoing
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those projected
in the forward-looking statements discussed herein.

General

AlphaRx is a drug delivery company specializing in the development of
innovative therapeutic products for the pharmaceutical and consumer health care
market. Our core competence is in the development of novel drug formulations for
therapeutic molecules or compounds that have exhibited poor gastro intestinal
absorption due to poor solubility or have yet be administerable to the human
body with an acceptable delivery method. Our drug delivery system is versatile
and offers significant flexibility in the development of suitable dosage
formulations (i.e. oral, topical or parenteral) to meet the requirements of
specific drug molecules.

The costs incurred for individual research and development initiatives to
date cannot be readily determined because (i) there is no clear distinction
between initiatives in order to be able to differentiate between them; (ii) all
initiatives have a common goal and that is to adopt our Bioadhesive Colloidal
Dispersion drug delivery system to the specific drug in order to improve that
drug's effectiveness; and (iii) we do not maintain a time control system to
separately classify research and development activities between similar
initiatives.

The nature, timing and estimated costs to complete a research and development
initiative and anticipated completion dates cannot be estimated because: (i) the
nature of research is experimental and we could encounter unforeseen situations
which could significantly delay project completion or require us to abandon the
project; (ii) timing to complete a research initiative depends, to a certain
extent, on financial resources and we cannot predict with any degree of
certainty that financial resources will be available when needed to complete any
specific initiative; (iii) we cannot significantly influence our partners and
licensees as to timing and completion of collaborative efforts, and (iii) cost
estimates cannot be predicted with any acceptable degree of accuracy due to
unforeseen issues arising during the clinical stages or the approval stages of
any specific initiative.

If we cannot complete our research and development initiatives on a timely
basis consequences to our operations could be significant to the point where the
initiative would be delayed or even abandoned. We would also face the risk of
competitors developing the same or similar products and being first to market.
Finally, our failure to develop products on a timely basis could substantially
impair our ability to generate revenues and materially harm our financial
position.

We cannot predict the timing of material net cash inflows from significant
initiatives due to a number of factors including (i) availability of financial
resources required to market a new product either directly or via a partner,
(ii) our lack of experience in bringing a new product to market successfully and
gaining market share; (iii) competitors' products and the nature and timing of
their marketing initiatives.

We intend to continue investing in the further development of our drug
delivery technologies and to actively seek collaborators and licensees to
accelerate the development and commercialization of products incorporating our
drug delivery systems. Depending upon a variety of factors, including
collaborative arrangements, available personnel and financial resources, we will
conduct or fund clinical trials on such products and will undertake the
associated regulatory activities.

14

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Recent Developments

During 2003 we initiated commercialization activities commencing with sales
of Flexogan in the Canadian market. It became evident during 2005 that we
required substantial additional financial resources to pursue our Flexogan
marketing strategy. We determined that completion of Phase II clinical trials
for Indaflex  was the best course of action with the resources remaining.
Should we be successful in raising additional funding we will continue to pursue
completion of Phase II clinical trials as our primary objective.

We signed a licensing agreement with Andromaco in August 2003
for the commercialization of our lead pharmaceutical product "Indaflex" in
Mexico. Mexican health authorities gave approval to Andromaco to start sales of
Indaflex in Mexico. We collected our first royalties from Indaflex sales in the
year ended September 30, 2005. Royalties continue to flow into the Company based
on sales generated in Mexico by Andromaco.

We established a wholly-owned subsidiary  AlphaRx International Holdings
Limited ("AIH") in April, 2005 and entered into a Joint Venture Agreement with
Basin Industrial Limited (a wholly-owned subsidiary of Advance Pharmaceutical
Co. Ltd.). The joint venture  AlphaAP Inc., is involved in the manufacture and
marketing of certain of the Company's existing products in the Asia region.

We have one pharmaceutical drug  Indaflex - in the clinical trial stage
(Phase 1 completed in March, 2005, Phase II underway as of November, 2005), and
several pharmaceutical drugs in the preclinical stage.

We signed a License Agreement with Proprius Pharmaceuticals Inc. ("Proprius")
during April, 2006. Under the terms of the agreement, Proprius will undertake
completion of clinical trials for Indaflex and will have exclusive global rights
(except for Asia and Mexico) to sell and or sublicense Indaflex and any
successor NSAID products developed by us. Should clinical trials for Indaflex be
successful and sales commence, we will receive clinical trial completion
milestone payments and sales milestone payments of up to $116 million. In
addition, we will receive royalty payments on sales of Indaflex by Proprius, its
affiliates and its sublicensees. There are presently 170 patients enrolled in
the Indaflex clinical trials, and we anticipate completion of the trials by the
end of December, 2006.

On May 1, 2006 we announced that AIH has entered into an agreement with China
Lianyungang City Golden Enterprises Limited ("China Party") to establish a Joint
Venture in mainland China. The Joint Venture intends to establish a
manufacturing facility in Lianyungang City, Jiangsu Province and a distribution
network in order to manufacture and market pharmaceutical products licensed by
AIH. In addition AIH will help to develop branded generic products in lieu of
capital payment into the Joint Venture. China Party has agreed to inject working
capital of RMB 250 million (approximately $31 million) into the Joint Venture in
the form of equity. AIH will own 30% of the Joint Venture common stock and China
Company will own 70%. AIH is also to receive a 5% royalty on all AIH licensed
product sales generated by the Joint Venture.

In June, 2006 AIH issued 1,500 shares of its common stock to New Super
Limited ("NSL") in accordance with an agreement concluded during April, 2006.
The shares were issued for total cash consideration of $HK 10 million (US
$1,288,826). There are presently 10,000 shares of common stock issued and
outstanding, of which 85% are owned by us. In accordance with SAB No. 51, we
have accounted for the issuance of our subsidiary's stock as a capital
transaction. Considering that AIH is essentially a non-operating entity, and
that the capital infusion was meant for commencement of business development in
Asia region, gain recognition was not appropriate.

In accordance with the agreement we anticipate a further infusion of $HK 10
million into AIH in exchange for a further 15% of shares of common stock on a
non-diluted basis on or before September 15, 2006. As a result we will own 70%
of AIH common stock upon completion of this transaction and NSL will own the
remaining 30%.

15

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RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 2006, AS COMPARED TO
THE NINE MONTHS ENDED JUNE 30, 2005

The Company incurred a net loss of $1,947,036 for the nine month period ended
June 30, 2006 as compared to a net loss of $3,525,126 incurred for the same
period a year ago, an decrease of $1,578,090 or approximately 45%. The decrease
stems primarily from an increase of revenues of about $1,000,000 and a decrease
in stock based compensation expense of about $658,000 for the nine months ended
June 30, 2006 when compared to the same period a year ago.

Revenues

Revenues consist of license fees, royalties and to a minor extent, Flexogan
sales. Total revenues for the nine month period ended June 30, 2006 were
$1,043,526 as compared to $43,283 generated for the same period a year ago, an
increase of $1,000,243. We recognized (and collected) $1,000,000 in license fees
for the nine months ended June 30, 2006 with no similar fees generated in the
same period a year ago. Sales of Flexogan continue, however, we are no longer
marketing Flexogan products and anticipate direct sales to diminish over the
coming months. We are seeking partners to market and sell our Flexogan line of
products in North America, and Flexogan sales have commenced in Asia via our
joint venture partner  AlphaAP Inc. We earn a 5% royalty on all Flexogan sales
in Asia generated by AlphaAP Inc.

Gross Margin

Cost of Sales for the nine months ended June 30, 2006 were $9,320 as compared
to $19,179 incurred for the same period a year ago. This is due to reduced
direct sales revenues for the nine month period ended June 30, 2006 as compared
to the same period a year ago. There are no direct cost of sales related to
license fees and royalties.

General and Administrative Expenses

General and Administrative expenses consist primarily of personnel costs
related to general management functions, finance, office overheads, as well as
insurance costs and professional fees related to legal, audit and tax matters.
General and Administrative expenses for the nine month period ended June 30,
2006 were $777,041 as compared to $561,326 incurred for the same period a year
ago, an increase of $215,715 or approximately 38%.

Included in this expense category for the nine months ended June 30, 2006 was
the write off of existing Flexogan inventory in the amount of $72,366 with no
comparable expense in the same period a year ago. As Flexogan products are no
longer being actively marketed, and to date there has been no success in
sourcing an active partner to market these products, the value of the inventory
was impaired, causing this write off. Also included in this expense category
were general and administrative expenses of AlphaRx Life Sciences Limited  a
wholly owned subsidiary of AlphaRx International Holdings Ltd. which is 85%
owned by us. We incurred $177,108 in administrative expenses related to our
subsidiaries' activities which involved obtaining approvals for manufacturing
and marketing our products in Hong Kong and mainland China as well as pursuit of
other Asian country approvals. There were no comparable expenses in the same
period a year ago. Finally, we incurred $143,354 in legal and financial
consulting fees for the nine month period ended June 30, 2006 as compared to
$198,390 incurred during the same period a year ago, a decrease of $55,036 or
about 38%.

Stock Based Compensation Expense and Warrant Amortization

We decided to adopt fair value accounting for employee stock options as per
SFAS 123(R) using the modified retrospective application method, effective April
1, 2005. Based on the significance of this expense we have disclosed the item
separately from general and administrative expenses. We expensed $655,475 in
stock based compensation during the nine months ended June 30, 2006 as compared
to $1,443,797 during the same period a year ago. There remains $72,362 in stock
based compensation to be expensed over the vesting period of the options
granted.

16

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We also issued warrants during the nine month period ended June 30, 2006 in
conjunction with the issuance of promissory notes. This, in turn, required a
discount to be established and to be amortized over the life of the promissory
notes. We amortized $130,214 of the discount during the nine month period ending
June 30, 2006 with no comparable expense in the same period a year ago. There
remains $351,858 in unamortized discount as at June 30, 2006.

Research and Development Expenses

Research and development expenses include costs for scientific personnel,
supplies, equipment, outsourced clinical and other research activities.

Research and development expenses for the nine months ended June 30, 2006
were $1,259,466 as compared to $953,521 incurred for the same period a year ago,
an increase of $305,945 or about 32%. The increase relates primarily to Phase II
Indaflex clinical trials underway, and to a certain extent, ongoing research and
development of other over the counter products. We anticipate a reduction in
research and development expenses during the next quarter primarily due to the
license agreement signed with Proprius. Under the terms of the agreement
Proprius covers the cost prospectively, of present and future clinical trials
related to Indaflex  the only drug undergoing clinical trials at this time.
Beyond our next quarter, research and development expenses may increase
depending on the availability of financial resources among other factors.

Sales and Marketing

We determined to curtail sales and marketing expenditures for our Flexogan
product line based on increasing competition in the pain relief segment of the
market and our available financial resources. Sales and marketing expenditures
were $86,564 for the nine months ended June 30, 2006 as compared to $571,286
incurred during the same period a year ago, a decrease of $484,722 or about 85%.

Depreciation

Depreciation totalled $54,040 for the nine months ended June 30, 2006 as
compared to $41,092 incurred during the same period a year ago, an increase of
$12,948 or about 32%. The increase stems from additional capital expenditures
incurred during the latter half of fiscal 2005 and during the most recent
quarter, which in turn resulted in incremental depreciation expenses.

Loss from Operations

Loss from operations were $1,928,594 for the nine months ended June 30, 2006
as compared to a loss of $3,546,918 incurred for the same period a year ago, an
decrease of $1,618,324 or approximately 46%. An increase in revenues of
$1,000,243 and a reduction in stock based compensation expenses of $658,108 were
the primary factors leading to the reduced loss from operations. Sales and
marketing expenses were reduced by $484,722, however, this reduction was
generally offset by an increase in research and development expenses of $305,945
and an increase in general and administrative expenses of $215,715 for the nine
months ended June 30, 2006 when compared to the same period a year ago.

Interest Income/Expense

Net Interest expense for the nine month period ended June 30, 2006 was
$47,526 as compared to net interest income of $21,792 generated during the same
period a year ago. We exhausted funds raised from a private placement during our
first fiscal quarter in 2006, necessitating the issuance of interest bearing
promissory notes. During the first nine months of fiscal 2005 we still had a
positive cash balance stemming from a private placement completed the previous
year.

17

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Minority Interest

We reflected minority interest of $29,084 for the nine months ended June 30,
2006, representing our minority shareholder's proportionate interest in our 85%
owned subsidiary  AIH. There was no minority interest in any of our
subsidiaries in fiscal 2005.

LIQUIDITY AND CAPITAL RESOURCES

As at June 30, 2006 the Company had working capital of $304,138 as compared
to a working capital deficiency of $(75,925) as at September 30, 2005. We issued
approximately $702,000 in promissory notes (before discount) during the nine
months ended June 30, 2006 and also assumed approximately $63,000 in promissory
notes upon the acquisition of AlphaRx Life Sciences Ltd. We intend to continue
to issue such promissory notes until we can source more permanent funding. We
have issued additional financing in the form of promissory notes in the amount
of CAD $100,000 subsequent to June 30, 2006. These notes are repayable within
one year and bear interest at 12% per annum. We also issued warrants in
conjunction with these promissory notes.

Since inception, we have financed operations principally from the sale of
Common Stock and issuance of promissory notes and expect to continue this
practice to fund our ongoing activities. During the three months ended June 30,
2006 we also issued common stock from our AIH subsidiary and in accordance with
our agreement with New Super Limited, we anticipate an additional cash infusion
of about $1.25 million on or prior to September 15, 2006 in exchange for
additional equity of AIH.

We currently do not have sufficient resources to complete the
commercialization of any of our proposed products or to carry out our entire
business strategy. Therefore, we will likely need to raise substantial
additional capital to fund our operations in the future. We cannot be certain
that any financing will be available when needed on acceptable terms or at all.
Any additional equity financings will be dilutive to our existing shareholders,
and debt financing, if available, may require additional stock to be issued
and/or involve restrictive covenants on our business.

We expect to continue to spend capital on:

1. research and development programs; 
2. preclinical studies and clinical trials; 
3. regulatory processes; and 
4. third party licensees and distribution partners to manufacture and market our
products for us.

The amount of capital we may need will depend on many factors, including:

1. the progress, timing and scope of our research and
development programs; 
2. the progress, timing and scope of our preclinical studies and clinical
trials; 
3. the time and cost necessary to obtain regulatory approvals; 
4. the time and cost necessary to establish or to retain sales and marketing
partners to market our products; 
5. the time and cost necessary to respond to technological and market
developments; and 
6. new collaborative, licensing and other commercial relationships that we may
establish.

The inability to raise capital would have a material adverse effect on the
Company. We currently have no capital commitments other than the payment of rent
on our facilities lease, and for certain research equipment.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

Certain of the information contained in this document
constitutes "forward-looking statements", including but not limited to those
with respect to the future revenues, our development strategy, involve known and
unknown risks, uncertainties, and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the risks and
uncertainties associated with a drug delivery company which has not successfully
commercialized our first product, including a history of net losses, unproven
technology, lack of manufacturing experience, current and potential competitors
with significant technical and marketing resources, need for future capital and
dependence on collaborative partners and on key personnel. Additionally, we are
subject to the risks and uncertainties associated with all drug delivery
companies, including compliance with government regulations and the possibility
of patent infringement litigation, as well as those factors disclosed in our
documents filed from time to time with the United States Securities and Exchange
Commission.

18

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ITEM 3. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer and Principal Accounting Officer,
has evaluated the effectiveness of the Company's disclosure controls and
procedures as of June 30, 2006. The Company's Chief Executive Officer and Chief
Financial Officer and Principal Accounting Officer concluded that the Company's
disclosure controls and procedures are effective for gathering, analyzing and
disclosing the information the Company is required to disclose in the reports it
files under the Securities Exchange Act of 1934, within the time periods
specified in the SEC's rules and forms.

19

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PART II: OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

There are currently no legal proceedings against the Company or any of its
subsidiaries.

ITEM 2 - CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES

We did not issue any stock during the nine months ending June 30, 2006. We
did issue warrants to purchase 300,000 shares of common stock in conjunction
with the issuance of promissory notes during the three months ended June 30,
2006. These warrants entitle the holder to purchase common stock at $0.10 per
share and expire in June, 2008. We also issued warrants to purchase 4,759,453
shares of common stock in conjunction with the issuance of promissory notes
during the six months ended March 31, 2006. These warrants entitle the holder to
purchase common stock at $0.10 per share and expire during February and March,
2008.

We did not issue any securities during the three months ended June 30, 2005.
During the six months ended March 31, 2005 we issued 5,203,470 shares of common
stock pursuant to the conversion of $520,347 in convertible debt. We also issued
warrants to purchase 10,406,940 shares of common stock at $0.30 per share in
connection with the conversion of debt. These warrants expire October 13, 2007.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4 - OTHER INFORMATION

None.

ITEM 5 - EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS.

31.1         Certification of C.E.O. Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. 31.2         Certification of C.F.O. Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. 32.1         Certification of Michael Lee pursuant to Section 1350 of Chapter 63 of
Title 18 United States Code. 32.2         Certification of Marcel Urbanc pursuant to Section 1350 of Chapter 63 of
Title 18 United States Code.

(b) REPORTS ON FORM 8-K

On April 19, 2006 we reported on a press release regarding a license
agreement that we entered into with Proprius Pharmaceuticals, Inc. Under the
agreement, we will receive an upfront payment of $1 million and will be eligible
to receive additional clinical and sales milestone payments of up to $116
million for the successful development and commercialization of Indaflex, as
well as royalties on all future sales.

20

---



On May 3, 2006 we reported on a press release regarding a joint venture
agreement entered into between our wholly owned subsidiary  AlphaRx
International Holdings Ltd and China Lianyungang City Golden Enterprises Limited
("China Party") to establish a Joint Venture company in mainland China. The
China Party has agreed to provide funding of up to RMB 250 million (about $31
million) to establish a manufacturing facility and a distribution network in
order to produce and market certain products and to develop new novel branded
generic products in China.

SIGNATURES:

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

DATED: August 14, 2006

| | ALPHARx, INC.                          
| | ---------------------------------------
| |                                        
| | By: /S/ Michael M. Lee                 
| | Michael M. Lee, Chief Executive Officer
| |                                        
| |                                        
| | Directors:                             
| |                                        
| | By: /S/ Michael M. Lee                 
| | Michael M. Lee, Director               
| |                                        
| | By: /S/ David Milroy                   
| | David Milroy, Director                 
| |                                        
| | By: /S/ Ford Moore                     
| | Ford Moore, Director                   

21

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